Previous momentum and seasonal factors combined last week to add to the market's gains for the year. Those factors should still be in evidence next week and technical factors have improved as a result of the market strength. Therefore, my model has increased its exposure to 50%. This is in spite of the fact that earnings estimates for the S & P 500 for 52 weeks ahead have now gone into a confirmed declining trend. Earnings for the fourth quarter will be very important but most companies will not report until very late in January. I will have another report on New Year's Day that will review performance for 2014.Earnings:This year's earnings estimate trend (adding in next year during second half) - PositiveEarnings estimates 52 weeks out - NegativeGap between future 52 week estimate and latest 12 month results - NeutralTotal earnings exposure and maximum total exposure under these conditions - 50%Sentiment: Equity put/call ratio - 50% Small investor put/call ratio - 35%NAAIM Manager cash position - 5%Average sentiment exposure this week - 30%Valuation:Long term valuation - 0%Stock prices represented by net current assets - 20%Stock earnings yeild compared to ten year treasury yield - 30%Average valuation exposure this week - 17%Total exposure from above three factors - 29%Technical Adjustments:Comparison of Treasury Bond yields compared to lower quality corporate bond yields...-10%New highs minus new lows on the NASDAQ...+20%Trend indicator for new highs minus new lows...0%Total technical adjustments...+10%Total stock exposure for the week - 39%Rounded to the nearest 25th percentile - 50%Stock Ideas:This week the top five ranked stocks used in my aggressive screen are: STRT, AMOT, LDL, CTP and SGC.

My model got whipsawed last week as its small short position got run over by a stampede in the latter part of the week. Two problems were the cause. First, data released during the week showed that the NAAIM managers raised significant cash, thus turning what was an extremely bearish indicator into just a somewhat negative indicator. Second, I have been too reliant on my sentiment indicators when one of them turns extremely bearish. I am going to simply average them in the future. So has anything really changed? No - earnings estimates continue to deteriorate and valuation is still too high. Technical factors are still negative. The improvement in sentiment indicators is enough to bump my model's exposure to a 25% level. My real portfolios have not suffered because I have remained totally hedged for the past two weeks so they are basically unchanged as is the market.Earnings:I am adding in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend but estimates for both 2014 and 2015 are being reduced. As long as the uptrend continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates have reversed and now are very close to turning negatve. This indicator for now, though, is still rated neutral. With one indicator positive and the other neutral, the earnings indicator remains at 75%, the same as last week..Looking at the gap between last twelve month earnings and future 52 week projections, the gap remains at negative levels but the gap is no longer increasing.The shrinking gap means that there is no adjustment to be factored in.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio continued to increase as a leftover from the decline.Exposure increases to 50%, up from 35% last week. Small option buyers have also become a bit less positive.Exposure increases to 35%, up from 20% last week.NAAIM managers raised cash before the turn up last week.Exposure increases to 5% this week, up from -10% last week.Average sentiment exposure is 30%, up from 0% last week.Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are now back below the yield on the ten year treasury bond. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 20%, same as last week. Comparison of stock earnings yield to ten year treasury yield decreased last week. Exposure declines to 50%, down from 70% last week.Total valuation exposure is 23%, down from 30% last week.To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 37%, up from 0% last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates remained in a decline last week. I subtract 10% to account for this factor. New highs - new lows on the Nasdaq remained negative last week. I subtract 10% to account for this factor.My trend indicator for new highs - new lows on the Nasdaq is not operative now since the previous indicator is negative.Total technical adjustments this week are -20%, same as last week.

After adjustments, total exposure for the week is 17% or, after rounding, 25%.This level of exposure does not exceed the current earnings cap and is up from -25% last week.Stock Ideas:This week the top five ranked stocks used in my aggressive screen are: AMOT, LDL, STRT, CTP and PATK.

I know it is almost unthinkable that the stock market could decline in December but that is indeed what my model is predicting. For the first time in about a year my allocation to stocks has moved to the short side. This was caused by a reversal of technical factors combined with continuing over-bullishness by small investors and speculators. Even earnings are beginning to look like they could reverse to the downside and that would be a much more problematic scenario going forward. For now, I am still fully hedged.Earnings:I am adding in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend but estimates for both 2014 and 2015 are being reduced. As long as the uptrend continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates have reversed and are still marginally negative. This indicator is still rated neutral. With one indicator positive and the other neutral, the earnings indicator remains at 75%, the same as last week..Looking at the gap between last twelve month earnings and future 52 week projections, the gap remains at negative levels but the gap is no longer increasing.The shrinking gap means that there is no adjustment to be factored in.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio reversed somewhat last week along with the market.Exposure increases to 35%, up from 20% last week. Small option buyers have also become a bit less positive.Exposure increases to 20%, up from 5% last week.NAAIM managers continued to be fully invested and actually increased their exposure last week.Exposure remains at -10% this week, same as last week.When one of my sentiment indicators is maximum negative and the other two are neutral or negative, I assign a sentiment exposure of 0%. This is the same as last week.Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are now back below the yield on the ten year treasury bond. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 20%, same as last week. Comparison of stock earnings yield to ten year treasury yield increased last week. Exposure increases to 70%, up from 50% last week.Total valuation exposure is 30%, up from 23% last week.To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 0%, same as last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates remained in a decline last week. I subtract 10% to account for this factor. New highs - new lows on the Nasdaq turned negative last week. I subtract 10% to account for this factor.My trend indicator for new highs - new lows on the Nasdaq is not operative now since the previous indicator is negative.Total technical adjustments this week are -20%, down from +10% last week.

After adjustments, total exposure for the week is -20% or, after rounding, -25% (short).This level of exposure does not exceed the current earnings cap and is down from 0% last week.Stock Ideas:This week the top five ranked stocks used in my aggressive screen are: AMOT, LDL, STRT, CTP and PATK.

I am traveling this week but my model has gone to a zero exposure recommendation for equities based on continuing deterioration in sentiment measures. Nothing much else has changed - The major averages are still inching higher but most stocks are going nowhere. Earnings expectations are just OK and valuation is very high. The technical indicators are deteriorating as well. It was actually a borderline call as to whether the model would go to a 25% short position. All in all, this is a high risk environment that I prefer to watch from the sidelines.